Schafer: Piling on is the rage for Best Buy critics

Article by: LEE SCHAFER

Star Tribune

October 25, 2012 - 8:54 PM

It was probably inevitable, given the challenges at Best Buy Co., but criticism has started to seem like nothing more than piling on.

The announcement this week that the current quarter is going to be another step down, with earnings far less than last year's third quarter and same-store sales down at least 3.2 percent, was the kind of news that would confirm a pretty harsh opinion of the company's future. That's understandable.

But critics are pounding Best Buy for even small steps that seem common-sense positive, like selling a Best Buy house brand of tablet computer.

Best Buy did not announce its proprietary tablet by renting a theater, as Apple might, instead dribbling out news last week on the company's Insignia brand Facebook page. Perhaps observers could have properly concluded that maybe Best Buy's executives think a private-label tablet is not much of a story.

Not the way it went. Reuters characterized it as head-to-head competition with products from the likes of Apple and Amazon.com, and critics started coming off the high rope to jump on Best Buy's chest for this new blunder.

Without a doubt, they argued, Best Buy would lose money selling a bland product in an acutely competitive niche, while alienating key Best Buy suppliers at the same time. Another sign of a company that's lost its way completely.

One investor commentary ran with a headline "Best Buy's Worst Idea Yet," and another read "Best Buy's Chance of Survival Just Got Worse."

In fact, it is hard to see how selling a private-label tablet has much to do with whether Best Buy succeeds over the next decade. What the criticism confirms in spades is that Best Buy has become a Wall Street punching bag.

How bad is it? "Most people don't think they're going to be in business in five years," said analyst David Strasser, of the investment firm Janney Montgomery Scott.

According to Thomson Reuters, there are 22 investment opinions on Best Buy's stock. There is one sell rating, one underperform rating, and 19 hold ratings, which you could read as shorthand for "stay away from the stock." The only buy rating is Strasser's, and while he brought down his earnings estimates he stuck to the buy rating after this week's announcement.

Best Buy's challenges are by now pretty well understood. It faces a tough competitor in Amazon.com, whose customers use Best Buy stores as showrooms before clicking and buying. Getting more aggressive on price to match online competition, as Best Buy has said it will do, may keep market share but at the expense of operating margin. Its own online business is underdeveloped, it probably has too much real estate, key suppliers sell direct to consumers, and so on.

But there is another case to be made as well, and if not exactly bullish at least it is something other than apocalyptic. Here are some things to consider, gleaned from analyst reports.

This holiday season Windows 8 and the new Wii U game console may bring more shoppers back to categories that have been under pressure. In mobile devices, Best Buy may continue to take market share. Best Buy should be able to internally generate all the capital it needs to implement a new strategic plan.

New CEO Hubert Joly is moving fast to put his team in the right roles, another step coming this week as a layer of executive management in the U.S. operation was removed. He is ready to present his team's assessment of the business and areas of focus in New York on Thursday, and his first day at work was just Sept. 4.

"Whether he can fix the business is a wide-open question," McGranahan said. "But he is going to come out and talk to [investors], and people are going to say, 'Hey, this guy is actually pretty impressive.'"

Then there is the possibility that founder Dick Schulze may yet succeed in a quest to take Best Buy private.

As for criticism of Best Buy's decision to sell a private-label tablet, Strasser sounded genuinely puzzled. "Why would they not do that?" Strasser said. "They have done that in other categories pretty successfully."

The Insignia brand that will go on the tablet is one that Best Buy uses for its TVs, one of several Best Buy brands that include Dynex and Rocketfish. Insignia is a top 10 brand for Best Buy, according to the company.

Best Buy plans to begin selling the Insignia Flex the second week of November, and it's really no bet at all. Best Buy has ordered 25,000 units. Not sure what might be considered material at a company the size of Best Buy, but it's pretty clear that stocking 25,000 units of nearly any small consumer product is not.

Best Buy spokesman Jeff Haydock said it is "totally inaccurate" to suggest Best Buy seeks to compete aggressively with Apple or Samsung, and that its tablet will help fill out the offerings in a booming category important to Best Buy.

The Insignia Flex is a 9.7-inch screen tablet that will be priced around $250, so clearly at the value end of the range for larger tablets.

Putting the 25,000 units of inventory into some context, "the reality is we're going to sell millions of tablets this year," Haydock said.

The recent little post and photo of the Flex on the Facebook page for Insignia showed that so far 85 people have, in the style of Facebook, liked it.

Given the unremittingly negative talk about Best Buy of late, let's call those 85 votes in favor a very hopeful sign.